THE BLUR BETWEEM LEGAL & ILLEGAL

Today’s newsletter brings to the forefront the shifting definition between legal and illegal. First, the blurred line between tax minimization, tax avoidance, and tax evasion. Second, the massive data collection and storage of every personal detail of your life. And the new reality that the U.S. banking scheme that allows the banks and the government to steal your bank deposits – even when FDIC insured - Cyprus style.

The newsletter is relatively short, so let’s jump right in.

The Blur Between Legal and Illegal

First, tax minimization and tax planning are both legal means to reduce tax burdens. Why would anyone engage in tax planning unless the result was a lower tax bill? On the other hand, tax evasion, is not legal.

Governments across the globe are attempting to blur the concepts of what’s legal, and what’s not. Today ‘acceptable’ tax planning (such as buying a tax efficient investment, or as found in a properly drafted Will or family trust) and ‘unacceptable’ tax planning are the new code words being applied to traditional legal tax planning. In other words, if the government doesn’t like your tax planning – even if it’s perfectly legal - then it becomes ‘unacceptable avoidance’.

It is the concept of ‘unacceptable’ legal tax planning that is making most of the headlines today.

The media tells us how the government is targeting ‘high risk’ taxpayers, which are generally those individuals engaging in offshore investing or planning. There are ominous warnings about the increasing use of data to detect suspected tax avoidance. The problem is that the overwhelming majority of the targeted taxpayers are engaging in perfectly legitimate transactions.

And while attempting to redefine the acceptable limits of legal tax planning, the Washington Post reports that a top-secret National Security Administration data-mining program, called 'Prism', taps directly into the Google, Facebook, Microsoft and Apple servers among others. “The National Security Agency and the FBI are tapping directly into the central servers of nine leading U.S. Internet companies, extracting audio, video, photographs, e-mails, documents and connection logs that enable analysts to track a person’s movements and contacts over time,” reports the Post.

This link reports and diagrams the list and details of the Prism collection details. And this interesting twenty five minute panel discussion delves deeper into the blurred abyss with those involved in the program. For the record, Google's CEO Larry Page denies the report.

Big Brother has long ago arrived. George Orwell would be gobsmacked.

For the past several years giant computers have already been trawling through your emails and personal data, analyzing your every movement. The $1.2 billion Utah Data Center is now capturing all forms of communication, including your private emails, cell phone calls, internet searches, and personal data trails, such as parking receipts, travel itineraries, bookstore purchases, and loads of other data.

This blurred perspective of defining the legal limits of privacy is part of the government's strategy to expand the various tax compliance and disclosure agreements with other countries in an attempt to collect even more data to deter people from hiding their money offshore. The OECD countries already have numerous cross border agreements requiring banks from other venues to hand over bank customers details. Governments advertise that there will be many more agreements of this type. And the message is supposed to be clear – you and your money can’t hide.

However, there is a still a long list of perfectly legal benefits to taking your money offshore.

To start with, investment diversification offers far superior, less risky, and better paying alternatives. And asset protection is another key benefit to keep frivolous and cantankerous individuals away from your hard-earned money. Offshore businesses, second homes, part time living, and retirement planning, are all additional reasons and benefits for going offshore. And in some cases there are still a number of tax benefits for going international.

The bookOffshore Living & Investing, 2nd edition, goes into the details of some of these benefits, and compliance measures.

This brings us to FATCA

FATCA is another perfectly bad example of America's blurred vision wrapped in wrong-headedness, arrogance, and narrow-mindedness in dealing with the rest of the world. This terrible draconian legislation has global significance and yet there was no prior collaboration - or even consultation - with the other OECD countries, the G8, or the customary inter-governmental organizations before it was introduced.

Instead, FATCA was a unilateral U.S. declaration of hostility against all foreign nations, made by the U.S. Senate, that didn’t grasp the enormity of what it was doing against foreign financial institutions (FFI) across the world.

An FFI is very broadly defined. It includes large and small banks, financial houses, and even local pension funds and company share option plans. If a company qualifies as an FFI, then it has to comply with a very long list of IRS requirements. The rules are enormously confusing, burdensome and expensive.

And if you, as a banking customer, even dare to question the compliance process – or even demonstrate a disapproval of the requirements - you will be labelled recalcitrant (i.e. someone with an uncooperative attitude toward authority) and the FFI is required to refuse to deal with you as a customer, and report you as to the IRS.

The aim of FATCA is to make sure that U.S. taxpayers are not hiding money or assets abroad. While FATCA does nothing specific to identify or punish U.S. tax cheats, it instead punishes the rest of the world by creating a massively invasive and expensive global burden. It's allright for the government to blur the line of legality and infringe upon the national sovereignty of other nations, but beware of the new blurred line of acceptable planning.

Today, some 50 countries have already signed up with the U.S. to alternative FATCA rules - referred to as Inter-Governmental Agreements (IGAs) - in an attempt to reduce this massively unfair and expensive burden. The theory is that if a country signs up to an IGA, then, under the bilateral agreement, certain exemptions and allowances can be made to reduce the FATCA burden on the citizens of the other countries involved.

It is under these IGAs that these countries automatically disclose your details so they will then have fewer obligations to the IRS. In turn, during the process, these countries obtain a huge amount of new data about the assets of their own citizens from the other jurisdictions. As a result, other countries have realized that FATCA is a wonderful opportunity to join in the great data trawl across the world, hoping to catch some of its own citizens in the process.

Getting back to the new blurred line between acceptable and unacceptable tax planning, there used to be a thick line between legal tax minimization and tax evasion. But it now seems that we have a new line drawn in the sand - which is a very grey and murky line - found somewhere between acceptable and unacceptable tax minimization. And in an effort to police this nebulous line, all citizens are subject to more and more invasive intrusions into their daily lives via the data trawls and FATCA reporting requirements.

Trying to stop and catch dishonest individuals who illegally hide their assets is one thing, but an indiscriminate, intrusive worldwide data collection system that places law-abiding individuals engaging in perfectly legitimate global investment diversification and legal tax minimization, is altogether different. I agree with the former, but the latter represents despicable treatment by the U.S. government engaging in illegal monitoring against honest, hard-working individuals across the globe.

Will that be a Mocha with your Tax Planning?

Consider the example of Starbucks.

This international company was the subject of a massively negative media campaign in the British press by those that believe individuals with more money should pay more taxes. No one alleged that Starbucks engaged in any unlawful tax evasion. To the contrary. Starbuck’s tax planning was fully transparent and had been reported to and accepted by the British government for many years.

But it didn’t matter that Starbucks was acting legally, according to those looking to redefine legal tax planning measures. Presently, tax planning shouldn’t be considered too clever, or too effective, as that crosses the new murky, blurred line between acceptable and unacceptable tax planning.

FDIC Deposit Insurance is a Blurred Reality

You think it’s better to just stay home and avoid going offshore? You think your cash is safer in U.S. banks instead? And that a depositor haircut - Cyprus style - couldn’t happen in the U.S.?

Think again.

The $25 billion in U.S. deposit insurance (FDIC) arises from federal law designed to preserve and protect some $9.2 trillion in U.S. deposits. That's a paltry amount designed to protect huge deposits. But a far bigger problem exists when you consider the "asset" side of the U.S. banks' ledger. Remember, deposits are unsecured liabilities. And for U.S. banks, sadly, over the counter derivatives represent the vast majority of "off the books" assets. According to the latest OCC quarterly report, the total derivative notional outstanding of the top 25 holding companies is nearly $300 trillion…with a ‘T’.

In other words there are 32 times more notional derivatives than there are total deposits, while the ratio of gross derivatives to deposit insurance is a concerning 11,900-to-1.

To solve the lack of FDIC insurance amounts in the U.S., there is a little known Cyprus ‘haircut’ scheme that the U.S. and British governments quietly prepared to resolve the next financial crisis. In other words, already set in place is an advance plan to give depositors haircuts on their federally insured deposits in U.S. banks.

The 15-page FDIC-BOE document is called “Resolving Globally Active, Systemically Important, Financial Institutions”. You can locate your copy here. It begins by explaining that the 2008 banking crisis has made it clear that some other way besides taxpayer bailouts is needed to maintain ‘financial stability’. Evidently, already anticipating that the next financial collapse will be on a far grander scale than either the taxpayers or Congress is willing – or able - to underwrite, the authors state:

“An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company [meaning the depositors] into equity [or stock]."

In the U.S. and the U.K., the new equity would become capital in one or more newly formed operating entities (i.e. good banks and bad banks). The equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved bank. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution and no longer have cash on deposit. Don't believe it? Read the above FDIC-BOE resolution.

No exception is made for “insured deposits” in the U.S., meaning those deposits under $250,000 - the deposits you thought were protected by FDIC insurance. This can hardly be an oversight, since it is the FDIC that is issuing the directive. The FDIC is an insurance company funded by premiums paid by private banks. The directive is called a “resolution process,” defined as a plan that “would be triggered in the event of the failure of an insurer . . . .”

Are you still convinced that your hard earned money is safer in a U.S. FDIC bank at home? Or that you don’t need to diversify with international planning to protect your hard earned assets?

Beggar Thy Neighbor

At the heart of the new blurred line between acceptable and unacceptable legal tax planning, data collection, and stealing depositor's money, is an increasing intolerance of wealth and the people who create it. Tax rates today at higher income levels are some of the highest seen in long term history (setting aside some short term higher rates during times of war, or oppressive government), there are already new demands against those with any measurable wealth.

Plain and simple: this is nothing more than a redistribution from those who create, to those that don’t. It’s no wonder why higher net worth individuals want to engage in legal tax minimization, at home and abroad, and diversify their investments and asset protection offshore.

Yet increasingly, some of our politicians feel that you still don’t pay enough taxes, or that what you earned doesn't belong to you.

These misguided souls feel that if they can just pile on more taxes and burdensome compliance measures to discourage international planning, it will make all of our economic woes go away. Then, they can just carry on with more irresponsible spending.

But what these irritating, misguided bureaucrats don’t realize, is that we don’t live in a closed system, and that you can engage in legal, international planning and activities where there are always opportunities to legally mitigate taxes and protect assets.

The record number of U.S. citizens renouncing their citizenship is certainly far less than the 4 to 6 million U.S. citizens living and working abroad. But the number of those renouncing their citizenship has certainly jumped during recent years. While these numbers are still not huge – at least not yet - it appears the U.S. doesn’t truthfully disclose the real numbers, as the true number of expats appear terribly under-reported, according to discussions with colleagues who don’t see their clients listed.

People have many and varied reasons for international planning, or at least moving some money and maintaining assets offshore. When they leave or move their capital offshore, their entrepreneurial spirit and spending goes with them. And that makes the local economy even worse.

That’s the point about these burdensome laws and the blurred line which the government creates against perfectly legal activity.

FATCA, like other compliance reporting and the data trawls, are massively counter-productive to the economy and society as a whole. When the government increases taxes and the administrative burdens on their citizen’s lives, then the smart and the wealthy ones will move somewhere else.

But if you are a U.S. taxpayer, becoming a non-U.S. resident doesn’t help you, since you are still taxed on your worldwide income, wherever you reside. And the reporting requirements follow you.

U.S. Congress forced FATCA and other draconian laws on the world with the hubristic assumption that the rest of the world is desperate to invest in the U.S. economy. That might have been true 20 years ago, but today an abundance of investment opportunities exist throughout the world. However, as foreigners continue to disengage with the U.S., the real losers will be the Americans at home.

Foreign investors are simply treating the U.S. as a no-go zone as the lines become increasingly blurred.

Learn More

The world is truly a small, amazing place.

But if you are a high net worth individual, or maintain a generous income level, it’s going to become increasingly difficult to stay under the radar. With the many new bilateral and multi-lateral agreements between countries, it’s likely that your personal data will fall into the hands of a government official somewhere, and the data will be exchanged with a government official somewhere else. The concept of privacy is being eroded, and will eventually disappear.

No doubt tax cheats will be captured in the process and we won’t shed a tear for them. But what makes the process painful for the rest of us in the law abiding majority, is that we too are caught up in this data collection process.

And then anyone deemed to have crossed the blurred line between acceptable and unacceptable planning - albeit perfectly legal - will be taken to the woodshed if international planning is not set up or maintained correctly. The key is to get it right in the first place.

For more international tips, start here. And at our site you can locate complimentary Past Newsletters here.

(Licensed to Practice Law in U.S. States & Federal Courts; Assoc. Member Auckland, N.Z. District Law Society - Foreign Lawyer; & Assoc. Member Queensland Law Society, AU - Foreign Lawyer)

The comments herein are not intended to constitute a legal or tax opinion regarding any specific legal or tax issue as additional issues may exist; does not reach a conclusion with respect to any specific legal or tax issue addressed herein or any additional issues not included; and cannot be used for the purpose of avoiding legal or tax obligations or penalties with respect to issues in or outside the scope of matters discussed herein.

(c) Copyright by David A. Tanzer & Associates, P.C. All rights reserved. Except as permitted under the United States Copyright Act of 1976, as amended, and pursuant to the laws of all countries, no part hereof may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, electronic or otherwise, without the prior written permission of David A. Tanzer & Associates, P.C. Reprint in whole or part strictly prohibited unless prior written permission is granted. International Copyright protected under the Berne Convention, Universal Copyright Convention and laws of all other Copyright protected countries, and consistent with the World Trade Organization TRIPS.

How to Subscribe: Do you know someone who would be interested in the free E Newsletter? If so, please feel free to forward this message to a colleague or friend. If they like it, they can add themselves to the subscriber’s list by visiting our website at www.DavidTanzer.com by filling out the form under “Sign Up For Free E Newsletter.” It’s free!